- First Group has received a conditional offer from I Squared
- This could be at 118p, could be 163p
- It depends upon the value we ascribe to the conditionality
First Group (LON: FGP) shares could be said to be above the indicative bid for the company and they could also be said to be below the amount being offered for FGP. We have a sort of Schroedinger's Cat- style bid here which makes a proper valuation of where First Group shares should be somewhat difficult.
For while First Group has received an unsolicited and conditional offer from I Squared Capital Partners the difficulty is in that “conditional” part.
This is the part that is difficult to value:
The Board together with its advisers, is currently evaluating the latest approach, received yesterday evening, which provides for a cash component of 118 pence per share and a contingent right to up to a further 45.6 pence per share based on the outcome of the First Transit earnout and the net proceeds realised from the Greyhound legacy assets and liabilities.
The difficulty being why we could describe First Group shares as being above the offer at 118 p (at Pixel time they're at 139p, up 7% on the day) or below that full value of 163.6p including all of the contingent payments.
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The valuation difficulty is that we don't really know the probability of gaining those contingent payments. They stem from the £300 million that First Group could receive in profits from the sale of the US bus business and Greyhound property and then there's as much as £117 million if it turns out that the pensions schemes don't need boosting. We just don;t know how likely those payments are to arrive. Or not arrive, as the case may be.
It's also true that the probability of their arriving – perhaps possibility – should already be encapsulated in the First Group share price. So, being offered a premium to the price before the bid plus the contingent payments can be seen as a definite advance on matters. For the offer is the capital value of the contingent payments times their probability plus the payments themselves if they arrive.
On top of this there's the obvious point that I Squared might not be the only potential bidder out there, and that this might not be their fully and final offer. So there's also the possibility of a higher bid from either them or someone else. Which is likely why the First Group share price is currently well ahead of the immediate cash component of the current bid.
Finally, there's the point that First Group runs trains. The market in the UK having grossly changed just recently. Franchises are pretty much gone, operators work for the DoT now and gain a flat margin for their work. This is likely a much better position to be in that actually owning something given the 25% fall in commuting as a result of work from home. But what no one really knows at present is what the value of being a management operator is going to be. It could, given that it is now derisked, be higher than being a franchise operator. Or, the lack of profit potential could make it lower.
As for trading positions, the basic calculation is probably, well, will there be another bid or a higher one from I Squared? In any short term that's the likely determinant of First Group shares.